The hype around buy now pay later (BNPL) around the world has waned. Sweden’s Klarna, which last year was Europe’s most valuable fintech startup slashed its valuation from $46 billion to just $6.7 billion in its last funding round and cut its workforce by 10 per cent. Australia’s Zip has seen its share price fall by 90 per cent over the past year and terminated its merger with Sezzle over macroeconomic conditions while US-based Affirm also saw its share price falter after Apple announced its own BNPL offering.
The rise in the cost of living and high inflation has dented consumer spending, resulting in concerns that those who do opt to purchase goods through BNPL, will not be able to maintain their payments. Regulators have also focused their attention on BNPL companies, demanding greater transparency and better affordability checks on customers.
In the Middle East and North Africa (Mena), this sentiment is not quite yet as potent. When the first few players emerged, they provided a unique offering to the market, a form of credit in a region where consumers have limited payment options.
Take up of BNPL in the region has skyrocketed, so much so that “people cannot imagine a checkout page without it”, according to Abdulmajeed Alsukhan, co-founder and CEO of Saudi Arabia-based Tamara.
“The market has been underserved for a long time, we have a unique case in the GCC where most banks have focused on corporate banking. Most of the banks were reluctant to give loans unless you worked for the public sector. They would make it very, very hard for you to access simple, small amounts [of credit],” he adds.
In the wake of the lockdowns and rise in online shopping, BNPL became a way for consumers to manage their expenses amid rising economic uncertainty and job insecurity.
“I believe this region has now officially embraced BNPL,” says Alsukhan, adding that it has become the main payment option for 80 per cent of consumers at checkout, while research from checkout.com suggests that 50 per cent of all Mena will use BNPL this year.
But for Hosam Arab, founder and CEO of UAE-based Tabby, buy now pay later has been “grossly overhyped. There has been way too much attention on the sector”.
BNPL startups were the “poster child” of fintech startups when they first emerged in the region, securing some of the biggest investment rounds in 2021 with startups in this segment raising in excess of $232 million. But as the war in Ukraine has pushed up food prices and sent inflation rates soaring, investors have become hesitant, adopting a wait-and-see approach.
“The public markets are not looking good, tech as a whole has taken a hit, payments has taken a larger hit and BNPL has taken an even larger hit. Twelve months ago, they were the biggest gainers, but some normalisation is happening now. It’s become extremely competitive, largely driven around the hype. Some of this hype needs to die down and bring the sector back to earth,” says Arab.
So far this year, investment in BNPL startups and other fintechs that offer BNPL exceeded $100 million.
“Given the fact that markets have cooled, investor sentiment has also cooled. We will see a decent amount of consolidation in this space, players will find it difficult to raise capital to scale, it is very capital intensive to scale,” says Arab, who in March closed a $54 million Series B round led by Sequoia Capital India and STV.
Regionally, BNPL has become a “quick race to the bottom on pricing”, according to Arab who adds: “We all monetise via the merchant and merchants realise their importance to the equation and they can drive down pricing.”
This is why a few startups in the region have adopted different business models, to prevent such a heavy reliance on merchants and investors.
For UAE-based Cashew, partnering with Mashreq bank has eliminated the need to seek out other investors. The startup, which pivoted from providing banking software to BNPL, partnered with Mashreq which invested $10 million, to launch its services through a revenue sharing model.
“The banks have been operating in this market for decades, there is something to learn from their experience, we’re stronger if we combine their expertise. Our business model is providing tech, we manage the end to end user onboarding. We prefer to partner with the bank for the balance sheet, so we make sure we never run out of banks,” says Ibtissam Ouassif, co-founder of Cashew.
Banks cannot provide BNPL in a seamless manner according to Ouassif. “If they could, they would have done it already. It’s not about the skillset, it’s about compliance and regulations. BNPL or fintech can move faster, that’s the strong suit, it’s the tech itself and the maintenance of the whole journey,” she says.
Meanwhile in Egypt, the largest BNPL market after the UAE and Saudi Arabia, one fintech is offering a “save now, pay later” model, where customers pay LE100 upfront for the option of paying in instalments. The founders, who previously worked at ValU, the BNPL offering from investment bank EFG Hermes, describe Sympl as an “evolution” of ValU.
“We have noticed the market is influenced and controlled by the purchasing power of the people who already have funds and liquidity in their accounts,” says Mohamed El-Shabrawy El-Feky, co-founder and CEO of Sympl. “The percentage of the needy people or credit hungry people, those are the segments that all the financial institutions are competing for.”
The journey for Sympl, which last year raised $6 million, starts at the checkout, cutting back the need for marketing costs.
“We approach them at checkout while they’re already paying for products or services they need and we give them a pay later option – save your money and pay later. If you’re charging the first instalment upfront, it’s 25 per cent of how much the customer has in their account and it is not aligned with the saving plan we want to promote,” says El-Feky.
Given the popularity of paying in instalments, other payments companies have also launched their own BNPL offerings in Mena, including Visa and Amazon Payment Services.
Amid the rise in competition, there is growing pressure to diversify what BNPL offers. Tabby is launching its BNPL Visa card, which will automatically allow customers to pay for goods in four instalments in brick and mortar shops listed on Tabby's platform.
“If you look at BNPL as purely a payment method at checkout, it becomes commoditised,” says Arab.To avoid this commoditisation, Tabby has introduced a cashback loyalty programme for its customers who can ascertain benefits beyond splitting payments.
Meanwhile Tamara’s Alsukhan claims his company is “going beyond BNPL”, and focusing on the overall online shopping experience."We are innovating in the discovery space, making sure you get what you need at a price you like.”
Analysing global BNPL trends can give us some insight into what might happen in the region.
“The trends are obviously increasing the product offering, consumers and merchant partners want six or 12 months repayment plans, you can do that if you have the balance sheet,” says Ouassif. “We see this trend in the US and Europe, where you offer longer tenure and when you do, you increase the ticket size and you can go into other sectors beyond fashion and retail.”
Regionally, BNPL has expanded to healthcare, education, insurance and the automotive sector.
“BNPL has taken over the e-commerce space, now we’re getting out of that landscape a bit and consumers have gone back to the stores and malls,” says Ouassif. “Retailers are asking for the solution to be in stores as well.”
The business of BNPL
In the quest to differentiate and offer both customers and merchants more than just an alternative payment method, some BNPL players are looking at the B2B segment. In Saudi Arabia, Afundy, launched in May 2021 as a Shariah-compliant, B2B BNPL fintech, offers a form of trade financing for e-commerce businesses. It purchases their stock and resells it to the online retailer who pays for it in instalments with a flat fee rate of 5 to 15 per cent.
Afundy’s technology analyses the seller’s revenue patterns and sales and marketing patterns to decide the credit-worthiness of the retailer and caters its offerings according to that.
“It is very practical and accessible, they [retailers] can integrate their accounts efficiently and get funding in three days, as opposed to banks who require two years’ of audited financial statements. They have to put in a lot of documentation that might take a few weeks or months,” says Mohammed Sabbagh, co-founder and CEO of Afundy.
Typically,e-commerce traders purchase their own stock and store it in warehouses, whether their own or one that is leased.Through a player like Afundy, “the trader doesn’t need to worry about inventory, logistics or funding. They can focus on selling online and that’s how we help them grow”, says Sabbagh.
Globally, default rates for BNPL rise alongside their popularity. A survey of the 40 per cent of Americans who had used BNPL, showed that more than a third had missed a payment while Klarna’s rate of delinquencies doubled last year. While this has resulted in millions of lost and delayed payments, the risk in the B2B space is substantially higher according to Sabbagh.
“The risk is higher in the [B2B] space, funding small businesses who have much higher chances of collapse,” he says. But given that Afundy’s model is a revenue-based form of financing, the risk is somewhat lower.
“Having access to their revenue stream, we know their data which helps us forecast what their revenue will be tomorrow, so it mitigates our risk by 99 per cent as opposed to banks who look at historical data,” says Sabbagh.
Afundy is not alone in pinning its hopes on the B2B sector. UAE-based Toggle, a B2B marketplace for the restaurant and hospitality sector has also ventured into the BNPL space by partnering with underwriters and private creditors to facilitate its financing services to its customers. Toggle Market uses credit risk modelling and banking data to offer B2B customers flexible financing solutions including up to 365 days trade credit.
Farther afield, the likes of Germany’s Mondu and Billie and UK-based Playter have attracted significant investment for their B2B BNPL offerings as valuations for the B2C players suffer.
But while investors may feel more comfortable with the B2B-focused startups, competition will likely stiffen, particularly as more B2B marketplaces offer their own BNPL offerings while the global macroeconomic uncertainty will no doubt hit this segment too.
Carving out a niche amid the competition will become the key focus of all BNPL players in the region. At a time when “super apps” have gained traction, we will likely see BNPL fintechs offer a fuller suite of products in order to retain customers, which will make way for more exits and consolidation.